Accounting Articles > General Accounting:
Financial statements for a durable goods company
Entire textbooks have been written on this subject. By definition, there isn’t a whole lot different in this type of accounting other than the inventory valuation.
Most of the elements that one would have in a non-durable goods financial statement are going to be exactly the same in a durable goods financial statement.
The difference in inventory is going to be generally a valuation issue. If you’re in the business of selling used automobiles then you have an inventory which, in general, will go down in value every single day that it sits on your lot. If you were in the business of selling fresh fruit, it doesn’t generally decrease incrementally. Its either sale-able or it spoils and is a complete write-off.
Coming up with a reasonable inventory valuation in a durable goods company can be challenging.
Let's again use the used auto dealership as an example:
- You purchased a unit of inventory for $10,000.
- Between mechanical repairs, and cleaning, you have another $2,000 into the car.
- It has been on your lot now for eight months and has depreciated in value.
- The last wholesale auction you attended had a similar unit that sold for $10,900. After checking other market price sources, this number seems to be reasonable.
Even though you have $12,000 into the car, it should be valued at only $10,900. This concept in accounting is called lower of cost or market.
If you have a durable goods company, be careful to choose the correct accountant. One that doesn’t have the proper background and experience can cost you a lot of money.
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